New Era University

College of Accountancy
Cost Accounting
Absorption and Variable Costing
CVP Analysis

Part I - Theories

1. Under variable costing, fixed manufacturing overhead is:

A) carried in a liability account.
B) carried in an asset account.
C) ignored.
D) immediately expensed as a period cost.

2. Which of the following is true of a company that uses absorption costing?

A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs.
C) Unit product costs can change as a result of changes in the number of units manufactured.
D) Variable selling expenses are included in product costs.

3. Under absorption costing, fixed manufacturing overhead costs:

A) are deferred in inventory when production exceeds sales.
B) are always treated as period costs.
C) are released from inventory when production exceeds sales.
D) none of these.

4. Which of the following costs at a manufacturing company would be treated as a product cost
under both absorption costing and variable costing?
Variable overhead Variable
selling and administrative
A) Yes Yes
B) Yes No
C) No Yes
D) No No

5. Under absorption costing, product costs include:

Fixed factory overhead Variable factory
overhead
A) No No
B) No Yes
C) Yes Yes
D) Yes No

6. Which of the following are included in product costs under variable costing?
I. Variable manufacturing overhead.
II. Fixed manufacturing overhead.
 III. Selling and administrative expenses.
A) I, II, and III.
B) I and III.
C) I and II.
D) I.

7. Under variable costing:

A) net operating income will tend to move up and down in response to changes in levels of
production.
B) inventory costs will be lower than under absorption costing.
C) net operating income will tend to vary inversely with production changes.
D) net operating income will always be higher than under absorption costing.

8. In an income statement prepared using the variable costing method, fixed selling and
administrative expenses would:
A) be used in the computation of the contribution margin.
B) be used in the computation of net operating income but not in the computation of the
contribution margin.
C) be treated the same as variable manufacturing expenses.
D) not be used.

9. In an income statement prepared using the variable costing method, fixed manufacturing
overhead would:
A) not be used.
B) be used in the computation of the contribution margin.
C) be used in the computation of net operating income but not in the computation of the
contribution margin.
D) be treated the same as variable manufacturing overhead.

10. In an income statement prepared as an internal report using variable costing, variable selling
and administrative expenses would:
A) not be used.
B) be used in the computation of the contribution margin.
C) be used in the computation of net operating income but not in the computation of the
contribution margin.
D) be treated the same as fixed selling and administrative expenses.

11. When production exceeds sales, the net operating income reported under absorption costing
generally will be:
A) less than net operating income reported under variable costing.
B) greater than net operating income reported under variable costing.
C) equal to net operating income reported under variable costing.
D) higher or lower because no generalization can be made.

12. When sales exceed production, the net operating income reported under variable costing
generally will be:
 A) less than net operating income reported under absorption costing.
B) greater than net operating income reported under absorption costing.
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

13. A single-product company prepares income statements using both absorption and variable
costing methods. Manufacturing overhead cost applied per unit produced under absorption
costing in year 2 was the same as in year 1. The year 2 variable costing statement reported a
profit whereas the year 2 absorption costing statement reported a loss. The difference in
reported income could be explained by units produced in year 2 being:
A) Less than units sold in year 2.
B) Less than the activity level used for allocating overhead to the product.
C) In excess of the activity level used for allocating overhead to the product.
D) In excess of units sold in year 2.

14. The type of costing that provides the best information for breakeven analysis is:
A) job-order costing.
B) variable costing.
C) process costing.
D) absorption costing.

15. Advocates of variable costing argue that:

A) fixed production costs should be added to inventory because such costs have future
service potential and therefore are inventoriable as an asset.
B) fixed production costs should be capitalized as an asset and amortized over future periods
when benefits from such costs are expected to be received.
C) fixed production costs should be charged to the period in which they are incurred unless
sales do not equal production in which case any difference should be capitalized as an
asset and amortized over future periods.
D) fixed production costs should be charged to the period in which they are incurred.

16. Which of the following is correct? The break-even point occurs on the CVP graph where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses.
D) total variable expenses equal total contribution margin.

17. If a company decreases its total fixed expenses while increasing the variable expense per
unit, the total expense line relative to its previous position on a cost-volume-profit graph will:
A) shift upward and have a steeper slope.
B) shift upward and have a flatter slope.
C) shift downward and have a steeper slope.
D) shift downward and have a flatter slope.

18. East Company manufactures and sells a single product with a positive contribution margin. If
the selling price and the variable expense per unit both increase 5% and fixed expenses do
 not change, what is the effect on the contribution margin per unit and the contribution margin
ratio?
Contribution Contribution
margin per unit margin ratio
A) No change No change
B) Increase Increase
C) Increase No change
D) Increase Decrease

19. Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase
next year will not cause unit sales to decrease. What effect would this price increase have on
the following items for next year?
Contribution Break-even
Margin Ratio Point
A) Increase Decrease
B) Decrease Decrease
C) Increase No effect
D) Decrease No effect

20. The contribution margin ratio is equal to:

A) Total manufacturing expenses/Sales.
B) (Sales - Variable expenses)/Sales.
C) 1 - (Gross Margin/Sales).
D) 1 - (Contribution Margin/Sales).

21. The contribution margin ratio always increases when the:

A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease.
D) variable expenses as a percentage of net sales increase.

22. In the middle of the year, the price of Lake Corporation's major raw material increased by
8%. How would this increase affect the company's break-even point and margin of safety?
Break-even point Margin of safety
A) Increase Increase
B) Increase Decrease
C) Decrease Decrease
D) Decrease Increase

23. A $2.00 increase in a product's variable expense per unit accompanied by a $2.00 increase in
its selling price per unit will:
A) decrease the degree of operating leverage.
B) decrease the contribution margin.
C) have no effect on the break-even volume.
D) have no effect on the contribution margin ratio.
24. The break-even point in unit sales is found by dividing total fixed expenses by:
A) the contribution margin ratio.
B) the variable expenses per unit.
C) the sales price per unit.
D) the contribution margin per unit.

25. Which of the following would not affect the break-even point?
A) number of units sold
B) variable expense per unit
C) total fixed expenses
D) selling price per unit

26. If a company increases its selling price by $2 per unit due to an increase in its variable labor
cost of $2 per unit, the break-even point in units will:
A) decrease.
B) increase.
C) not change.
D) change but direction cannot be determined.

27. To obtain the dollar sales volume necessary to attain a given target profit, which of the
following formulas should be used?
A) (Fixed expenses + Target net profit)/Total contribution margin
B) (Fixed expenses + Target net profit)/Contribution margin ratio
C) Fixed expenses/Contribution margin per unit
D) Target net profit/Contribution margin ratio

28. Salinas Corporation has a degree of operating leverage of 8. This means that a 1% change in
sales dollars at Salinas will generate an 8% change in:
A) variable expenses.
B) fixed expenses.
C) contribution margin.
D) net operating income.

29. In calculating the break-even point for a multi-product company, which of the following
assumptions are commonly made?
I. Selling prices are constant.
II. Variable expenses are constant per unit.
III. The sales mix is constant.
A) I and II
B) I and III
C) II and III
D) I, II, and III
Part II – Problems

1. Gyro Gear Company produces a single product, a special gear used in automatic
transmissions. Each gear sells for $28, and the company sells 500,000 gears each year.

Unit cost data are presented below:

Variable Fixed
Direct material ........................... $6.00
Direct labor ................................ $5.00
Manufacturing overhead ............ $2.00 $7.00
Selling & administrative ............ $4.00 $3.00

The unit product cost of gears under variable costing is:

2. A company produces a single product. Variable production costs are $12 per unit and
variable selling and administrative expenses are $3 per unit. Fixed manufacturing overhead
totals $36,000 and fixed selling and administration expenses total $40,000. Assuming a
beginning inventory of zero, production of 4,000 units and sales of 3,600 units, the dollar
value of the ending inventory under variable costing would be:

3. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Units in beginning inventory ................................. 0

Units produced ...................................................... 7,700
Units sold ............................................................... 7,500
Units in ending inventory ...................................... 200
Variable costs per unit:
Direct materials .................................................. $40
Direct labor ......................................................... $34
Variable manufacturing overhead ...................... $3
Variable selling and administrative .................... $10
Fixed costs:
Fixed manufacturing overhead ........................... $146,300
Fixed selling and administrative ........................ $60,000

What is the unit product cost for the month under variable costing?

4. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ........................................................... $85

Units in beginning inventory ................................. 0
Units produced ...................................................... 5,000
Units sold ............................................................... 4,600
Units in ending inventory ...................................... 400
 Variable costs per unit:
Direct materials .................................................. $19
Direct labor ......................................................... $15
Variable manufacturing overhead ...................... $2
Variable selling and administrative .................... $10
Fixed costs:
Fixed manufacturing overhead ........................... $110,000
Fixed selling and administrative ........................ $69,000

What is the total period cost for the month under the variable costing approach?

5. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ........................................................... $78

Units in beginning inventory ................................. 0
Units produced ...................................................... 5,300
Units sold ............................................................... 4,900
Units in ending inventory ...................................... 400
Variable costs per unit:
Direct materials .................................................. $31
Direct labor ......................................................... $14
Variable manufacturing overhead ...................... $2
Variable selling and administrative .................... $5
Fixed costs:
Fixed manufacturing overhead ........................... $68,900
Fixed selling and administrative ........................ $58,800

What is the total period cost for the month under the absorption costing approach?

6. The following data pertain to last year's operations at Tredder Corporation, a company that
produces a single product:

Units in beginning inventory ........................... 0

Units produced ................................................ 20,000
Units sold ......................................................... 19,000
Selling price per unit ....................................... $100.00
Variable costs per unit:
Direct materials ............................................ $12.00
Direct labor ................................................... $25.00
Variable manufacturing overhead ................ $3.00
Variable selling and administrative .............. $2.00
Fixed costs per year:
Fixed manufacturing overhead ..................... $500,000
Fixed selling and administrative .................. $600,000
 What was the variable costing net operating income last year?

7. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ............................................... $102

Units in beginning inventory ..................... 0
Units produced .......................................... 8,700
Units sold ................................................... 8,300
Units in ending inventory .......................... 400
Variable costs per unit:
Direct materials ...................................... $29
Direct labor ............................................. $31
Variable manufacturing overhead .......... $2
Variable selling and administrative ........ $6
Fixed costs:
Fixed manufacturing overhead ............... $269,700
Fixed selling and administrative ............ $8,300

The total contribution margin for the month under the variable costing approach is:

8. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ............................................... $123

Units in beginning inventory ..................... 0
Units produced .......................................... 5,900
Units sold ................................................... 5,700
Units in ending inventory .......................... 200
Variable costs per unit:
Direct materials ...................................... $40
Direct labor ............................................. $32
Variable manufacturing overhead .......... $3
Variable selling and administrative ........ $5
Fixed costs:
Fixed manufacturing overhead ............... $135,700
Fixed selling and administrative ............ $108,300

The total gross margin for the month under the absorption costing approach is:

9. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ............................................... $85

Units in beginning inventory ..................... 0
Units produced .......................................... 2,900
 Units sold ................................................... 2,700
Units in ending inventory .......................... 200
Variable costs per unit:
Direct materials ...................................... $22
Direct labor ............................................. $13
Variable manufacturing overhead .......... $3
Variable selling and administrative ........ $5
Fixed costs:
Fixed manufacturing overhead ............... $46,400
Fixed selling and administrative ............ $51,300

What is the net operating income for the month under variable costing?

10. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

Selling price ............................................... $103

Units in beginning inventory ..................... 0
Units produced .......................................... 1,700
Units sold ................................................... 1,400
Units in ending inventory .......................... 300
Variable costs per unit:
Direct materials ...................................... $39
Direct labor ............................................. $32
Variable manufacturing overhead .......... $6
Variable selling and administrative ........ $5
Fixed costs:
Fixed manufacturing overhead ............... $6,800
Fixed selling and administrative ............ $8,400

What is the net operating income for the month under absorption costing?

11. Stead Company produces a single product. Last year, the company's net operating income
computed by the absorption costing method was $6,400, and its net operating income
computed by the variable costing method was $9,100. The company's unit product cost was
$17 under variable costing and $20 under absorption costing. If the ending inventory
consisted of 2,100 units, the beginning inventory in units must have been:

12. King Company produces a single product. During March, the company had net operating
income under absorption costing that was $3,500 lower than under variable costing. The
company sold 7,000 units in March, and its variable costs were $7 per unit, of which $3 was
variable selling expense. If fixed manufacturing overhead was $2 per unit under absorption
costing, then how many units did the company produce during March?

13. Johnson Company produces a single product. Last year, the company had 25,000 units in its
ending inventory. Johnson's variable production costs were $10 per unit and fixed
 manufacturing overhead costs were $5 per unit. The company's net operating income last
year was $10,000 higher under variable costing than it was under absorption costing. Given
these facts, the number of units of product in beginning inventory last year must have been:

14. Rose Corporation produces a single product. Last year, the company had net operating
income of $50,000 using variable costing. Beginning and ending inventories were 3,000 units
and 18,000 units, respectively. If the fixed manufacturing overhead cost was $2.00 per unit,
what would have been the net operating income using absorption costing?

15. A company that produces a single product had a net operating income of $85,500 using
variable costing and a net operating income of $90,000 using absorption costing. Total fixed
manufacturing overhead was $150,000, and production was 100,000 units. Between the
beginning and the end of the year, the inventory level:

16. Olympia Company produces a single product. Last year, the company had a net operating
income of $92,000 using absorption costing and a net operating income of $98,600 using
variable costing. If the fixed manufacturing overhead cost was $3.00 per unit for the last two
years, and if production was 18,000 units, then sales in units last year were:

Use the following to answer questions 17-24:

Abbitt Company, which has only one product, has provided the following data concerning its
most recent month of operations:

Selling price ....................................................... $142

Units in beginning inventory .............................. 0
Units produced ................................................... 2,500
Units sold ........................................................... 2,300
Units in ending inventory ................................... 200
Variable costs per unit:
Direct materials ............................................... $22
Direct labor ..................................................... $57
Variable manufacturing overhead ................... $1
Variable selling and administrative ................. $6
Fixed costs:
Fixed manufacturing overhead ........................ $82,500
Fixed selling and administrative ..................... $41,400

17. What is the unit product cost for the month under variable costing?

18. What is the unit product cost for the month under absorption costing?

19. The total contribution margin for the month under the variable costing approach is:

20. The total gross margin for the month under the absorption costing approach is:

21. What is the total period cost for the month under the variable costing approach?
22. What is the total period cost for the month under the absorption costing approach?

23. What is the net operating income for the month under variable costing?

24. What is the net operating income for the month under absorption costing?

25. The following information relates to the break-even point at Pezzo Corporation:
Sales dollars ...................... $120,000
Total fixed expenses ......... $30,000

If Pezzo wants to generate net operating income of $12,000, what will its sales dollars
have to be?

26. The following information relates to Snowbird Corporation:

Sales at the break-even point ......... $312,500
Total fixed expenses ...................... $250,000
Net operating income .................... $150,000

What is Snowbird's margin of safety?

27. The “Dog Hut” hot dog stand expects the following operating results for next year:
Sales ............................................... $280,000
Net operating income .................... $21,000
Contribution margin ratio .............. 70%

What is Dog Hut's break-even point next year in sales dollars?

28. The following information relates to Zinc Corporation for last year:
Sales ........................................................... $500,000
Net operating income ................................ $25,000
Degree of operating leverage .................... 5

Sales at Zinc are expected to be $600,000 next year. Assuming no change in cost
structure, this means that net operating income for next year should be:

29. The following information pertains to Nova Co.'s cost-volume-profit relationships:

Breakeven point in units sold ...................... 1,000
Variable expenses per unit .......................... $500
Total fixed expenses .................................... $150,000

How much will be contributed to net operating income by the 1,001st unit sold?

30. Barnes Corporation expected to sell 150,000 games during the month of November. The
following budgeted data are based on that level of sales:
 Revenue (150,000 games) ..................................... $2,400,000
Variable expenses .................................................. 1,425,000
Fixed manufacturing overhead expenses .............. 250,000
Fixed selling & administrative expenses ............... 500,000
Net operating income ............................................ 225,000

Barnes' actual sales during November were 180,000 games. What should the actual net
operating income during November have been?

31. Carver Company produces a product which sells for $40. Variable manufacturing costs are
$18 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity,
and fixed selling and administrative costs are $4 per unit. A selling commission of 15% of
the selling price is paid on each unit sold. The contribution margin per unit is:

32. Tice Company is a medium-sized manufacturer of lamps. During the year a new line called
“Horolin” was made available to Tice's customers. The break-even point for sales of Horolin
is $200,000 with a contribution margin of 40%. Assuming that the profit for the Horolin line
during the year amounted to $100,000, total sales during the year would have amounted to:

33. Black Company's sales are $600,000, its fixed expenses are $150,000, and its variable
expenses are 60% of sales. Based on this information, the margin of safety is:

34. Variable expenses for Alpha Company are 40% of sales. What are sales at the breakeven
point, assuming that fixed expenses total $150,000 per year:

35. Minist Company sells a single product at a selling price of $15.00 per unit. Last year, the
company's sales revenue was $225,000 and its net operating income was $18,000. If fixed
expenses totaled $72,000 for the year, the break-even point in unit sales was

36. Winger Corp. sells a product for $5 per unit. The fixed expenses are $210,000 and the unit
variable expenses are 60% of the selling price. What sales would be necessary in order for
Winger Corp. to realize a profit of 10% of sales?

37. Sales in East Company declined from $100,000 per year to $80,000 per year, while net
operating income declined by 300 percent. Given these data, the company must have had an
operating leverage of:

38. Darth Company sells three products. Sales and contribution margin ratios for the three
products follow:

Product
X Y Z
Sales in dollars .............................$20,000 $40,000 $100,000
contribution margin ratio ............. 45% 40% 15%

Given these data, the contribution margin ratio for the company as a whole would be:
39. Sunnripe Company manufactures and sells two types of beach towels, standard and deluxe.
Sunnripe expects the following operating results next year for each type of towel:

Standard Deluxe
Sales ............................................... $450,000 $50,000
Variable expenses (total) ............... $360,000 $20,000

Sunnripe expects to have a total of $57,600 in fixed expenses next year. What is
Sunnripe's break-even point next year in sales dollars?